39% QoQ but down 18.3% YoY. Loans and net interest margin (NIM) shrank, but fee income grew sequentially on the quarter. Expenses were well controlled. - Non-performing loans (NPL) dropped to 4.6% of the loan portfolio. The NPL coverage ratio was high at 81.7%. The bank's capital adequacy ratio (CAR) was also healthy at 15.6%. - SCB management has lowered its loan growth guidance for 2009 to 3-5% from 5-7%. SME lending would be a drag on growth. From the bank's perspective, the economy remains at risk and has not yet reached bottom. - We reiterate a BUY opinion on SCB with a price target of Bt70/share, as strong capital base, high NPL coverage ratio and adjustments to changing business conditions would enable the bank to weather risky economic conditions.

1Q09 earnings review Loans in the Jan-Mar period of 2009 were up 5.1% YoY but down 1.6% QoQ as a result of a steady decline in interest rates. Much of the loan contraction came from SME and retail lending, down 5.6% and 1.1% respectively, while corporate loans stayed flat. Deposits expanded 10.9% YoY and 8.0% QoQ. Net interest margin (NIM) posted a steeper-than-expected contraction of 3.6%, against 4% and 3.8% in 1Q08 and 4Q08 respectively, as excess liquidity was funneled into interbank and money markets, which generated low yield of a mere 1.7%. Dividends from Vayupak Fund also dropped. Non-interest income was down 6.6% YoY (excluding investment gains) but up 15.7% QoQ as fee income continue to grow 9% QoQ on the strength of bancassurance and asset management businesses. Operating expenses were well controlled though the bank added four new branched and 219 more ATMs to its network from end-2008, down 14.1% QoQ but up a marginal 0.1% YoY. The cost to income ratio averaged 48.2%. In sum, the bank posted a 1Q09 profit of Bt5.5b, up 39.3% QoQ but down 18.3% YoY. The results topped market expectations.

At end-Mar 2009, the bank has gross non-performing loans (NPL) of Bt49.9b, accounting for 4.6% of the loan portfolio, down from 5.1% in the prior quarter as a result of debt restructuring and tight credit controls. The NPL coverage ratio was 81.7%, above the industry average of around 70%. The bank's capital adequacy ratio (CAR) was also healthy at 15.6%, reflecting its strong capital base.

Management cuts 2009 loan growth target to 3-5% From the bank's perspective, the economy remains at risk and has not yet reached bottom. SCB management therefore see its loan growth target of 5-7% this year is too high and has therefore lowered its guidance to 3-5%. Corporate lending would continue to lead growth and the bank maintains its corporate loan growth target at 13% as it has tapped into a premium client base of foreign banks in Thailand. SME lending would be a drag on growth and fall short of the 5% growth target. Retail lending is expected to fall slightly short of the 5% growth target.

The bank's L/D ratio fell to 89.5% at end-Mar 2009. Including borrowings, the ratio stayed at 86.4%, reflecting an increased level of liquidity, which may put pressure on NIM in 2Q09. However, we are bullish on the bank's prospects based on fee income growth and effective expense controls. We also believe strong capital base and high NPL coverage ratio would enable the bank to weather risky economic conditions. We reiterate a BUY opinion on SCB with a price target of Bt70/share.